Is AGL now an ‘asset at play’

After upgrading AGL Energy (ASX: AGL) from a Buy to Hold last September, Ord Minnett has lifted the target price on the energy provider and Australia’s biggest coal-power producer to $8.70 from $7.55 following a broad industry update.

This implies a 17% upside on the company’s current share price ($7.43).

Having taken a closer look at the plan to demerge old from new at AGL Energy, Ord Minnett has concluded that the shares are no longer trading at less than the value of the retail operations alone.

Ord Minnett also sees significant potential upside in spot prices and hence for upgraded guidance in February and has incorporated a higher oil price forecast for the year ahead.

In light of what it also regards as an undemanding valuation, Morgan Stanley recently (06/10/21) increased its rating for AGL Equal-weight from Underweight but pulled the target price back to $6.47 from $6.88.

Greater upside in 2022

While AGL struggled throughout 2021, the share price has been on an upward trajectory since the beginning of the 2022, as sentiment towards the stock and its planned demerger has improved.

For example, echoing similar sentiment to Ord Minnett, Shaw and Partners recently described AGL as an ‘asset at play’ and expects the company’s stock to fair much better in FY22 than it did in FY21.

Meantime, Credit Suisse, which last upgraded its rating to Neutral from Underperform in mid-August last year, expects AGL to enjoy a significant rebound in earnings over 2023 and 2024 as increasing coal costs feed through to higher electricity prices.

Top pick

Due to its advantage in low-cost coal supply, and “substantial upside” to consensus forecasts for earnings from 2022-23, AGL is the broker’s top pick among Australian energy sector equities.

While debates continue about the life of coal plants generally, including the company’s Yang A coal plant in Victoria, AGL is still preparing for a demerger and is set to benefit from the rise in forward prices for wholesale power.

Credit Suisse expects net profit in 2022-23 to be 30% above consensus forecasts.

Merger doubts

But the broker has voiced doubts over whether the demerger will proceed, given the need for additional equity to support debt, and especially in light of where share prices are currently at.

However, Credit Suisse still expects higher prices for gas and for renewable energy certificates to give AGL’s margins a nudge forward.

Overall, due to Accel - the entity dubbed PrimeCo in the leadup to the demerger announcement - Credit Suisse has raised its target price for AGL to $8.50 a share from $7.30, but still suspects profits will sink sharply this financial year.

Consensus is Moderate Buy.

AGL's 12 month share price performance.